2 Answers
2

Strategy (B) will always win. In most simple sense, you are achieving a yield of 0.80% for investment in the first year, and sell-buying back at 0.80% for investment in the second year (because as you state the yield curve has not moved). This is known as carry. There is an indirect gain through price-roll, too.

Strategy (A) will perform poorly. In your scenario, the yield curve is monotonically increasing (upward sloping). The initial yield is 0.24% [clearly 56bp less carry than (B)], and the roll-down is relatively modest. Bond prices tend to behave oddly in the final days/weeks of trading, as a variety of market participants fund and arbitrage in very different ways.

Strategy A: You borrow at 0% and invest at 0.24% for one year, so you make 0.24% total return.

Strategy B: You borrow at 0% and invest for one year at 0.80%, making 0.80%. You then sell the 0.80% bond at a yield of 0.55% (it is now a 2yr bond, whose yield must be 0.55% if rates are unchanged). The price of this bond will be 100.50%, since you are getting an extra 0.25% for an additional 2 years. Hence your overall profit is 0.80% + 0.50% = 1.30%